International Accountant 115 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT JANUARY/FEBRUARY 2021 ISSUE 115

Money laundering: the risk of exploitation An era of change for financial accountants Rebuilding faith in audit

Self employment: what lies ahead?

CONTENTS

In this issue Contributors 2

Meet the team

News and views

AIA news

UK Endorsement Board website launched AIA submits evidence to the Treasury Select Committee Economic Crime Inquiry

8 Financial accounting

Students 8

A new normal What is the outlook for the coming year? 2021 will usher in an era of change for financial accountants, especially in terms of how the pandemic will continue to affect – and change – how companies operate. Scott Dietz (Moody’s Analytics) discusses several areas that will get significant exposure.

Developments in audit practice This article provides exam support to students sitting the audit papers in May 2021.

Rebuilding faith in audit The role and quality of audit has been under the spotlight in recent years following a string of high profile business failures. Stuart Cobbe (MindBridge) considers the essential changes needed in the audit process to rebuild confidence and deliver business value.

Self employment

Editor Rachel Rutherford E: editor@aiaworldwide.com T: +44 (0)191 493 0281

International Accountant Staithes 3, The Watermark, Metro Riverside, Newcastle Upon Tyne NE11 9SN United Kingdom

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What lies ahead? With 2021 now in full swing for the self‑employed, there are a few things to keep in mind as the new year brings several obstacles to navigate. Richard Hepburn (Gorilla Accounting) takes a closer look at some of the major events for the coming year.

Editorial Information International Accountant, the bimonthly publication of the Association of International Accountants (AIA).

+44 (0)191 493 0277 www.aiaworldwide.com

Software options for accountants When you’re looking for software to help manage your practice, you’re likely to find familiar, global names and younger, independently owned software. James Byrne (AccountancyManager) examines the factors that come into play when you are choosing your accounting software and the company that will provide it.

Inheritance tax

Risk assessment

Dates for your diary

The future of inheritance tax With Covid-19 forcing governments worldwide to look at tax increases, Dennis Petri (UHY International) asks whether inheritance tax is in line to rise. Should it be a prime target for tax increases in 2021 and beyond?

Auditing 14

Technology 20

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Avoid the risk of exploitation A comprehensive risk assessment is key to understanding the money laundering and terrorist financing risks that a business is exposed to. The AIA Compliance team examine the circumstances where there might be a high risk of exploitation in the accountancy sector. Upcoming events

Technical 28 Global updates

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Editor’s welcome

Contributors to this issue

Editor’s welcome

STUART COBBE

Stuart Cobbe is Director of Growth, Europe at MindBridge, helping finance professionals to embrace data driven decision making through AI and explore the ways that machine learning and data analysis can lead to assurance. SCOTT DIETZ

Scott Dietz is a Director of Regulatory and Accounting Solutions at Moody’s Analytics, with over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.

e start 2021 with some uncertainty about what the future may hold and significant work to be done to build the global economy. However, the AIA has forged ahead with new initiatives that support its members around the world as they take on the task of delivering quality business advice to all kinds of businesses in these unprecedented times. New resources have been added to the online Guidance and Insights libraries covering global tax updates, Brexit and accounting and auditing updates. Members can access this information via their MyAIA account. In this issue, we consider the outlook for the coming year. 2021 will usher in an era of change for financial accountants, especially in terms of how the pandemic will continue to affect – and change – how companies operate. Home working, Covid-19 business support measures, changing deadlines and adjustments to financial reporting will have an impact this year and accountants must plan and prepare for the inevitable long and shortterm changes that come with them. Supporting firms in regulatory and legislative compliance is one of AIA’s key functions. The AIA Compliance

Rachel Rutherford Editor, IA

Team has detailed the requirements of a comprehensive risk assessment so that firms can avoid the risk of exploitation and fully understand the risks of money laundering and terrorist financing. Elsewhere we consider how governments might look to reduce the enormous deficits that could not have been imagined 12 months ago and whether increasing rates or reducing reliefs on inheritance tax might be under consideration in many economies. Should inheritance tax be a prime target for tax increases in 2021 and beyond? The role and quality of audit has been under the spotlight following a string of high-profile business failures – and the economic implications of Covid-19 have reinforced the need for change. 2021 might also be the year that we see some fruition following the many recent reviews and we examine the essential changes needed in the audit process to rebuild confidence and deliver business value. For those continuing their studies this year and working to obtain the AIA professional qualification, we are continuing to develop high quality resources to support you through the qualification process. In this issue, we look at developments in audit which provides exam support to students for sitting the audit papers in May 2021.

RICHARD HEPBURN

Richard Hepburn is Operations Manager at Gorilla Accounting. His client focused approach and experience in the contractor accounting sector gives him a strong background on the accounting needs of contractors and their limited companies. JAMES BYRNE

James Byrne is CEO of AccountancyManager, a multi award-winning practice management software built to reduce back office administration for accountancy firms and bookkeepers. He is dedicated to providing a system which saves time, reduces human error and increases profitability. DENNIS PETRI

Dennis Petri is chairman of UHY International, a partner in UHY LLP and a managing director of UHY Advisors MI, Inc. Among his leadership roles of the firm’s national tax department and international tax group, Dennis also serves as international liaison partner. ISSUE 115 | AIAWORLDWIDE.COM

News ACCOUNTING STANDARDS

HONG KONG

UKEB website launched

Hong Kong Budget: government to be prudent

The UK Endorsement Board (UKEB) is being set up as the body responsible for influencing the development and subsequently endorsing and adopting new or amended international accounting standards, issued by the International Accounting Standards Board (IASB), for use by UK companies, from 1 January 2021. The UKEB website has now been launched. It will provide access to all key developments in relation to the UKEB and its work, including: ● UK-adopted international accounting standard; ● UKEB adoption status report; ● UKEB appointments and meetings agendas and minutes, etc.; and ● the UKEB work plan. The website supports access from a range of devices, including mobile, and allows subscribers to receive email alerts on the UKEB’s activities. You can subscribe to the website by sending an email to contact@endorsement-board.uk. Chair of the UK Endorsement Board, Pauline Wallace said: “The UK Endorsement Board will be guided

by certain principles when fulfilling its responsibilities in influencing the development of international accounting standards and their subsequent adoption for use in the UK. These principles include accountability, independence, transparency and thought leadership. I am delighted to launch the website. It will be an important platform for the Board to conduct its activities transparently, as well as keeping stakeholders up to date with all news and events.” The website can be found at: www.endorsement-board.uk.

MONEY LAUNDERING

HMRC issues record £23.8 million fine for money laundering breaches HM Revenue and Customs (HMRC) published the latest list of businesses handed fines for breaching strict regulations aimed at preventing criminals from laundering illicit cash. The list includes money transfer company MT Global Limited, which has been handed the largest ever fine issued by HMRC, for significant breaches of the regulations between July 2017 and December 2019 relating to: ● risk assessments and associated record keeping; ● policies, controls and procedures; and ● fundamental customer due diligence measures. AIAWORLDWIDE.COM | ISSUE

Nick Sharp, Deputy Director of Economic Crime, Fraud Investigation Service, HMRC, said: “Businesses who fail to comply with the money laundering regulations leave themselves, and the UK economy, open to attacks by criminals. “Money laundering is not a victimless crime. Criminals use laundered cash to fund serious organised crime, from drug importation to child sexual exploitation, human trafficking and even terrorism. “We’re here to help businesses protect themselves from those who would prey on their services. That includes taking action against the minority who fail to meet their legal obligations under the regulations as this record fine clearly shows.”

Carrie Lam, Chief Executive, Hong Kong

Hong Kong Chief Executive Carrie Lam said the government will have to be prudent after it rolled out multiple financial relief schemes last year. She said: “The Hong Kong Special Administrative Region Government has been rolling out financial relief schemes in the whole year last year. It took a heavy toll on the public finances of the Hong Kong SAR, so we have to be very prudent. “At the moment, I understand we have no plans to extend the Employment Support Scheme, and hence I can foresee that the unemployment figures that the government is going to announce will be bad.” Mrs Lam said the government will also take into account the views of the public and the Legislative Council in the Budget consultation when considering financial relief and other future relief measures. The Financial Secretary is conducting the consultation sessions in advance of the 2021/22 Budget, which will be delivered on 24 February.

News ENERGY TAXES

Better use of energy taxes Developing countries could raise much needed public revenues, while cutting emissions and air pollution, by making better use of energy taxes and reducing energy subsidies, according to a new OECD report. “Taxing energy use for sustainable development: Opportunities for energy tax and subsidy reforms in selected developing and emerging economies” examines energy taxation in 15 developing and emerging economies in Africa, Asia and Latin America and the Caribbean. The report finds that well-designed energy and carbon taxes can strengthen efforts to improve domestic revenue mobilisation. While the revenue potential varies across countries, the report finds that on average the countries could generate revenue equivalent to around 1% of GDP if they set carbon rates on fossil fuels equivalent to €30 per tonne of CO2. Energy tax and subsidy reform is key to achieving the triple objectives of decarbonisation, domestic revenue mobilisation and access to affordable energy. Developing and emerging economies battling to recover from the Covid-19 crisis with much lower tax revenues than advanced economies would benefit from better designed energy taxes accompanied by targeted support to low-income groups. Tax-toGDP ratios in the 15 countries studied average just 19%, compared to 34% across OECD countries. None of the 15 countries applies an explicit carbon price or uses CO2 emissions trading systems. To support poor households, fossil fuels used for heating, cooking and lighting are often taxed at low rates or subsidised, yet this weighs on public finances and in some cases can encourage excessive fuel use. In four of the 15 countries, the cost to public finances of energy subsidies exceeds income from energy taxes. Reducing subsidies, which tend to benefit wealthier consumers, and improving tax design could provide additional revenues for more targeted support to enhance energy access and affordability. The full report is available at www.oecd.org.

SELF ASSESSMENT

No Self Assessment late filing penalty for those who file online by 28 February Self Assessment customers who cannot file their tax return by the 31 January 2021 deadline will not receive a late filing penalty if they file online by 28 February. Self Assessment customers will not receive a penalty for their late online tax return if they file by 28 February, HMRCs’ Chief Executive Jim Harra has announced.

More than 8.9 million customers have already filed their tax return. HMRC is encouraging anyone who has not yet filed their tax return to do so by 31 January, if possible. However, anyone who cannot file their return by the 31 January deadline will not receive a late filing penalty if they file online by 28 February, according to HMRC.

COVID-19

Football clubs miss out on €2 billion revenue due to the Covid-19 pandemic

The 20 highest revenue generating clubs in world football will have missed out on over €2 billion in revenue by the end of the 2020/21 season, according to the 24th edition of the Football Money League published by Deloitte’s Sports Business Group. Set against the context of the global economic and social disruption caused by the Covid-19 pandemic during the 2019/20 season, the report profiles the highest revenue generating clubs in world football. Under normal circumstances, clubs typically have a financial year-end that aligns with their domestic season (May or June for most European leagues). The disruption to the 2019/20 football season and the differing approaches by the various leagues, broadcasters

and commercial partners have resulted in clubs’ revenue generated in respect of the 2019/20 season being spread across two financial years ending in 2020 and 2021. The majority of Deloitte’s analysis in this year’s Money League is focused on the financial year ending 2020. As a result, this has led to a deferral element and a permanently lost element (notably on matchday income, but also rebates to broadcasters) to the reduction in revenue. In terms of deferral, the disruption to the 2019/20 season in most clubs’ cases meant that approximately one quarter’s revenue from the financial year ending in 2020 has been shifted to the financial year ending in 2021, resulting in 2021 having an additional quarter’s revenue. ISSUE | AIAWORLDWIDE.COM

AIA News

AIA

NEWS ANTI-MONEY LAUNDERING

AIA broadens strategic partnerships with AIA is pleased to announce its latest strategic partnership with Dell Technologies, the leader in digital transformation, providing digital technology solutions, products and services to drive business success. This new exclusive partnership between Dell and AIA will provide members with total IT solutions, alongside a range of discounts, from 10% to 20% on laptops, desktops and other IT related accessories. Announcing the partnership, AIA Marketing & PR Manager, Carl Jepson, said: “We are delighted to welcome world leader in IT solutions, Dell Technologies, as a new strategic partner. “Members will benefit from discounted Dell products, as well as access to highly trained small business technology advisors who can offer professional support and advice on business growth and IT needs.” Dell Technologies is committed to transforming businesses, shaping the future of innovation and developing technologies to drive human progress through greater access to better technology for people with big ideas around the world. To find out more go to our dedicated Dell Technologies partner page. AIAWORLDWIDE.COM | ISSUE 115

STRATEGIC PARTNERSHIP

AIA submits evidence to the Treasury Select Committee Economic Crime Inquiry

The Association of International Accountants (AIA) has presented evidence to the United Kingdom Treasury Select Committee’s 2020 inquiry into anti-money laundering controls and systems in the UK. The Treasury Select Committee launched a new inquiry in October 2020 to review what progress has been made in combating economic crime. This inquiry has two strands: ● anti-money laundering systems and the sanctions regime, including the Financial Crimes Enforcement Network (FinCEN) papers and the work of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS); and ● consumers, including emerging trends as a result of coronavirus and authorised push payment fraud. Commenting on the launch of the inquiry, Mel Stride MP, Chair of the Treasury Committee, said: “The previous Committee made a series of

recommendations on the UK’s effort to combat money laundering and what can be done to prevent consumers from being victims of economic crime. The current Committee will now examine what progress supervisors, law enforcement and the government has made in these areas.” As a professional body supervisor recognised under Schedule 1 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLR) 2017 (as amended 2019), AIA recognises its key role in preventing economic crime and contributing to a robust approach to anti-money laundering safeguards. As part of the submission, an overview was provided of the work undertaken by AIA, as a supervisory body, to implement the money laundering regulations and ensure its members remain vigilant to the threat. AIA works with other accountancy sector supervisory bodies through the Accountancy Anti-Money Laundering Supervisors’ Group (AASG) and more

AIA News widely with government, regulators and other sectors through the Anti-Money Laundering Supervisors Forum (AMLSF) and additional working and intelligencesharing groups. This enables a real public-private partnership which delivers a focused response to the threat of money laundering and terrorist financing. As a membership organisation of professionals, AIA recognises that the regulations are also in place to protect members and safeguard against their being exploited by criminal elements to facilitate illicit activity. Therefore, AIA works to provide guidance and support, so members learn to recognise the red flags of money laundering and fulfil their obligations by reporting suspicious activity. In its response, AIA outlined several key improvements and observations: AIA works constructively with regulators, law enforcement agencies and other professional bodies to undertake its functions as a supervisor under MLR 2017.

Whilst there are effective mechanisms for combatting economic crime, such as the Intelligence Sharing Expert Working Group (ISEWG), there is more that could be done. As the Economic Crime Plan progresses, there is a case for consolidating and reviewing the current number of overlapping working groups and committees to refocus on the reforms. Accountants can be assessed to be either complicit or wilfully blind to money laundering risks, or at risk of being exploited by criminals due to negligence or being an unwitting accomplice to money laundering. It is arguable that accountants are more likely to be unwittingly involved in money laundering than undertake illicit activity. Professional bodies have an important role in providing support and guidance for members which is not available to non-registered individuals. The public interest argument could be strengthened by consolidating

and protecting the term “accountant”. Introducing this reform will help to strengthen the UK’s fight against economic crime and prevent unqualified and unsupervised individuals from evading effective oversight. Maintaining up-to-date knowledge and disseminating emerging anti-money laundering risks is a key activity to help members recognise, respond to and report suspicious activity. Following the recent HM Treasury consultation, there should be a more structured and transparent plan around allocating money collected for the Economic Crime Levy. AIA Director of Operations David Potts said, “Whilst there is still progress to be made to fulfil the government’s Economic Crime Plan 2019-22, as a supervisory body AIA has made significant contributions to progress to date, including strengthening internal controls, educating members, enforcing compliance and sharing intelligence.”

AIA responds to the EU-UK Trade and Cooperation Agreement On 24 December 2020, the UK and the EU reached an agreement on the terms of their future relationship and the EU-UK Trade and Cooperation Agreement came into force from 1 January 2021. AIA chief executive, Philip Turnbull said: “Avoiding the economic impact of a no deal scenario has been largely welcomed by businesses, along with

the opportunities of new trading relationships, throughout the world and the prospect of developing the future relationship with the EU. At the end of a year which has seen significant economic upheaval and trading disruption, the agreement offers businesses the clarity and certainty that they require to plan effectively for the future.

BREXIT

“However, it is important to realise the practicalities of this new agreement and whilst free trade is a welcome outcome, it does not mean a continuation of the previous arrangements. Businesses will have to navigate new rules and requirements, with some sectors feeling its consequences more acutely than others, and leaving the single market and customs union under these terms may also see businesses incur additional costs. “In relation to financial and related professional services, there are still some outstanding areas and the UK and the EU have agreed in a nonbinding declaration to establish a framework for regulatory co-operation by March 2021. AIA supports a future agreement that offers regulatory and supervisory cooperation, maintains mutual access to skills and talent and protects financial services.” Planning and preparation are now key to all businesses to ensure a smooth transition. AIA will continue to provide members with the latest information and guidance to ensure that they can guide their clients on the most effective Brexit strategy. Resources continue to be updated and are available to members via their online account (MyAIA/Guidance and Insights/ Accounting & Auditing Insights). ISSUE 115 | AIAWORLDWIDE.COM

AIA News FINANCIAL COMPLIANCE

The AIA event on “Protecting the Public Interest” took place 10 December 2020 and looked at the role of accountants and finance professionals in building public trust through professional and ethical conduct. Following multiple financial scandals, there has been a strong drive towards regulatory reform within the accountancy and audit sectors. AIA supports measures that strengthen the independence of auditors and ensure that a wider public interest is served in conjunction with the needs of company shareholders. Professional bodies play a key role in safeguarding public confidence in financial services through maintaining a high standard of professional conduct. This is inherent at all stages of an accountant’s career and is influential in setting behavioural expectations. AIA serves the public interest by

promoting the benefits of recognised, high quality, professional qualifications and delivering robust membership requirements, within a disciplinary framework, that gives additional reassurance and protection to the businesses that rely on accountancy services. In addition, AIA operates a strong compliance agenda that seeks to educate and ensure adherence to legal and regulatory best practice within the anti-money laundering and economic crime sphere. Further to government consultations seeking to raise standards within the tax market and the recent Treasury Select Committee Economic Crime Inquiry, AIA has called for statutory control of the term “accountant” in recognition that additional safeguards and public

PLAN THE RIGHT STRATEGY FOR YOUR CLIENT

AIA reaffirms its call for legal protection of the term ‘accountant’ to protect the public interest

interest concerns are met by consumers undertaking the services of a regulated individual. AIA chief executive, Philip Turnbull, said: “There has been a fragmented approach to accountancy regulation in the UK which increases the risk to the public through poor advice from unqualified practitioners and economic crime. There is therefore a strong public interest argument that protecting the term ‘accountant’ would provide a robust mechanism to safeguard businesses and consumers.”

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STUDENTS

Developments in audit practice This article provides exam support to students sitting the audit papers in May 2021.

key emerging trend in internal and external audit is the use of data analytics to generate core analysis to highlight anomalies in the integrity of the accounting data.

Data analytics and ethics

Students should ensure that they have explored the role of data analytics, its strengths and limitations in practice for both internal and external auditors in their wider reading. At the time of writing, the IESBA Technology Working Group is exploring the impact of big data, blockchain, data analytics, etc. on the ethics of the auditor but this will not report until mid 2020 and therefore is an emerging issue. However, the IESBA issued an ED Proposed Revisions to the Code to Promote the Role and Mindset Expected of Professional Accountants in July 2019, which aims to identify opportunities to emphasise and reinforce the mindset and behavioural characteristics expected of professional accountants in business and in public practice. This is discussed in more depth in the professional judgment section of this review.

Audit reporting

Students are reminded that audit reporting is another core area of the syllabus and that it extends more widely than the conventional audit report. The development of the extended audit report in the UK has influenced international audit reports and students should be familiar with this. There do, however, remain weaknesses in reporting and the Brydon Review recommends the following areas for improvements: ● Create continuity between successive audit reports. ● Provide greater transparency over differing estimations, perhaps disclosing graduated findings.

● Call out inconsistencies in information made public. ● Reference external negative signals and how they have informed the audit. The standard ISA 720 The Auditor’s Responsibilities relating to Other Information was revised in June 2016 and its impacts are starting to be seen in the current cycle of audit reporting. Under ISA 720, the auditor is responsible for ensuring that other information included in the audited financial statements is not materially inconsistent with either the financial statements or their understanding of the entity’s position from their knowledge of the business gained during the audit. This relates to all of the narrative information issued by the reporting entity and covers all of the material issued before the audit report. This supports the ethical requirement that the auditor avoids being knowingly associated with information that is either materially false or misleading. It is particularly focused on the need to make the auditor’s comment on the extended disclosure requirements for directors around risk and viability statements. The standard requires that the auditor specifically reviews and comments upon: a. the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; b. the disclosures in the annual report that describe those risks and explain how they are being managed or mitigated; and c. the directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to ISSUE 115 | AIAWORLDWIDE.COM

STUDENTS ● The medium term component would be a more robust and transparent version of the existing viability statement. This component of the resilience statement should include stress testing of various scenarios that could threaten the company’s business model, drawing on existing models currently used by the Prudential Regulation Authority for financial services companies. ● The long term component would provide an opportunity for directors to set out how they are positioning the business strategically to address the risks of, for example, climate change and other potential existential threats. These suggestions highlight current areas of concern in reporting and students should be familiar with these. The directors must ensure that the annual report, taken as a whole, is fair, balanced and understandable, and provides the necessary information for shareholders to assess the group’s position, performance, business model and strategy. In an examination context, the narrative information around risk reporting or going concern assessment, or other information issued with the financial statements, may not be accurate and students should be prepared to develop an appropriately worded report.

Sustainability reporting and assurance

ISA 720 Auditors’ Responsibilities Relating to Other Information 2016 This raises an interesting issue within the idea of the expectation gap, as the auditor’s requirement to comment has been operationalised as a statement that the auditors have reviewed the issues detailed above and have nothing material to add or draw attention to. The Brydon Review further proposes a resilience statement which would replace the existing going concern and viability statements: ● The short term reporting component of the statement would incorporate the existing going concern assessment, but with enhanced transparency, including the disclosure of material uncertainties that could impact on the company as a going concern before any mitigating action has been taken into account. AIAWORLDWIDE.COM | ISSUE 115

©Getty images/iStockphoto

whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the assessment period, including any related disclosures drawing attention to any necessary qualifications or assumptions.

The UN Sustainable Development Goals are being used as a framework by investors to assess the exposure of companies to risks to their ability to create sustainable value within the organisation. This links into the developments of integrated reporting and the recent report by the Task force for Climate Based Financial Disclosure. Policy makers within governments and regulators are also looking to these goals to drive the future direction of sustainability in companies. Within this framework, the sustainability accounting standards and other sustainable measures are being developed and the former were issued at the end of 2018. The 2017 recommendations of the Financial Stability Board (FSB) Task Force for Climate related disclosures, which seek to establish a framework for an organisation’s disclosures “that will help financial market participants understand their climate risk”, were widely adopted in the 2018 corporate reports. This is creating a significant market opportunity for sustainability assurance and sustainability consultancy as the standards provide a key framework against which corporate sustainable reporting can be assured. The approach of the professional practice to such an assignment is the same as any other assurance assignment. It consists of initially identifying the subject matter for the engagement and the interested parties who may be using this information. The standards against which the assurance would be carried out must

STUDENTS Exercise of Professional Judgment 120.5

A1: Professional judgment involves the application of training, knowledge and experience taking into account the nature and scope of the professional activity being undertaken. When exercising professional judgment, it is important that the professional accountant obtains a sufficient understanding of the facts and circumstances known to the accountant to identify, evaluate and address threats to compliance with the fundamental principles. In obtaining this understanding, the accountant might consider, among other matters, whether: ● there is an inconsistency between the known facts and circumstances and the accountant’s expectations; ● the information provides a reasonable basis on which to reach a conclusion; ● other reasonable conclusions could be drawn from the information being considered; ● the accountant’s own preconception or bias might be affecting the accountant’s judgment; and ● the accountant’s own expertise and experience are sufficient, or whether there is a need to consult with others with relevant expertise or experience.

Reasonable and Informed Third Party 120.5

A2A1: The reasonable and informed third party test is a consideration by the professional accountant about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be an accountant, but would possess the relevant knowledge and experience, to understand and evaluate the appropriateness of the accountant’s conclusions in an impartial manner. Proposed Application Material Relating to: a. Professional scepticism: linkage with the fundamental principles; and b. Professional judgment: emphasis on understanding facts and circumstances. Exposure Draft 17. © May 2017 by the International Federation of Accountants (IFAC). be explored and clarified. This process is essential to clarify the real risk areas in the assurance assignment, to understand the concerns of the company and to understand what assurance is seeking to achieve. A key idea for the auditor providing assurance against new sustainability standards is the idea of what would render the information useful. In common with all other information for decision making, this would reflect the ideas of appropriate standards of relevance, completeness, reliability, neutrality and understandability. This debate mirrors other debates around quality reporting, including narrative reporting, risk reporting and KPI reporting. There are challenges in ensuring that the information is fairly represented, unbiased, consistent and transparent. The ideas from the FRC in its Cutting the Clutter publication may help this wider issue to be appreciated. Further information can be found at: ● www.sasb.org/standards-overview/downloadcurrent-standards

The problems in ensuring audit quality in audit firms are clearly not easy to resolve.

● www.globalreporting.org/how-to-use-the-gristandards ● www.fsb-tcfd.org

Professional ethics

IFAC has noted that “public interest considerations must remain paramount in an age of Covid-19” and has produced an interesting article exploring some of the ethical and public interest issues raised by the current reporting and auditing environment (see bit.ly/38N0Iv8). The key issues highlighted are the heightened risk of fraud and error in corporate reports caused by the stress within the economy exacerbated by the challenges of remote working. It notes that “greater transparency and disclosure of forwardlooking information on an organisation’s operating performance, financial position, liquidity and future prospects are more critical than ever even though current circumstances make this more challenging. Professional accountants in business need to make reasonable, good faith judgments in the context, and, on the basis of, information currently available.”

Focus on audit quality

This IFAC framework (see bit.ly/2XHQjKW) provides a comprehensive overview of the factors driving audit quality at an engagement, firm and national level. It reiterates much of previous guidance but contextualises the ideas within the debate around the increasing focus on public interest. The problems in ensuring audit quality in audit firms are clearly not easy to resolve. The regulatory review into audit firms in the UK routinely highlights areas of weakness, and the spate of recent high profile audit scandals in public interest entities would support the idea that these problems result in poor quality in practice. It is therefore vital that students understand how audit quality is promoted and safeguarded in audit firms and it is an area that is frequently examined in this paper. “Audit quality policies in audit firms Audit is vital to investor confidence in UK companies. Poor quality audit work remains unacceptably common. The latest audit inspections for 2018/19, which relate principally to audits of companies’ December 2017 year ends, found 75% of FTSE 350 audits reviewed were good or required no more than limited improvements, compared to 73% in 2017/18. No firms achieved the FRC’s audit quality target for 90% of FTSE 350 audits to meet this standard. Looking across all audit reviews completed at the largest seven firms, the outcome was 75% compared to 74% in 2017/18. In the reports published, each firm has committed to specific actions to enhance audit quality including, for the worst performers, detailed audit quality improvement plans. The FRC will assess the success of these initiatives and secure further action if necessary. The FRC found cases in all seven firms where auditors had failed to challenge management ISSUE 115 | AIAWORLDWIDE.COM

STUDENTS sufficiently on judgmental issues. This has been a recurring finding over a number of years and it can have many contributory factors. These include the mindset of audit teams, especially an absence of professional scepticism in evaluating evidence presented by company management, tight reporting deadlines and the complexity of the judgments involved. Familiarity is also a factor arising from long-standing audit relationships, particularly if the company comes to be considered as “the client” for the auditor, rather than the shareholder or investor.” Financial Reporting Council (2019) “Firms’ Audit Quality Monitoring” In the UK, there is evidence that audit firm quality procedures are not as robust as the regulator might prefer. There is also evidence that the audit firms have a tendency to underestimate problems with their own work. This is not entirely unexpected as subconscious bias will tend to mean that auditors who work within a specific audit culture will not be able to appreciate its weaknesses and it is very difficult for an audit firm to be objective about its own quality. However, there is an increased focus from IFAC and national regulators on firm audit quality policies and monitoring of such. A key issue arising from the impact of Covid-19 on audit firms is the change to remote working and the challenges this creates for ensuring audit quality and ethical compliance. The IESBA has produced a very helpful guide which explores how ethics may be compromised due to these issues, with some useful ideas of how this can be mitigated in practice (see bit.ly/3ssSMXO). IFAC has also explored how Covid-19 issues may increase the need for more extensive and frequent engagement quality reviews. The challenge of performing these remotely is also addressed and IFAC observes the following: ● Effective communication between the reviewer and the audit team is important to maintain virtually. ● Auditors are having to make more significant judgments than ever before throughout all stages of the audit, and the reviewer will need to undertake an objective evaluation of these. It may be beneficial to have the reviewer look at significant judgment areas sooner rather than later. ● A small or medium sized practice may need to engage with an external reviewer outside of their own practice.

Professional judgment

Professional judgment remains a key area of concern to regulators. The Brydon Review recommends that “ARGA (the new UK Regulator) should revisit the existing definition of professional judgment with a view to strengthening, and demonstrating better, the use of judgment in audit” (see bit.ly/3nMfPZZ). The developing ideas in ED Proposed Revisions to the Code to Promote the Role and AIAWORLDWIDE.COM | ISSUE 115

Mindset Expected of Professional Accountants 2019 articulate key areas that all professional accountants should consider to ensure that professional judgment is robust. This includes the following: ● Obtain and understand information relevant for making reliable judgments based on facts and circumstances known to them. ● Make informed challenges of views developed by others. ● Be sensitive to the integrity of information, including the source of the information and the appropriateness of its presentation. ● Withhold judgment pending thoughtful consideration of all known and relevant available information. The ideas around acting with integrity have also been further developed to expand from the idea of fair dealing and truthfulness and the requirement to be straightforward and honest in all professional and business relationships. Integrity also requires having the determination to act appropriately when confronting dilemmas and can include: ● standing one’s ground when facing pressure to do otherwise during the course of performing professional activities; and ● challenging others as and when appropriate, even when doing so creates potential adverse personal or organisational consequences.

In the UK, there is evidence that audit firm quality procedures are not as robust as the regulator might prefer. There is also evidence that audit firms have a tendency to underestimate problems with their own work.

IFAC Exposure Draft 17: Professional Judgment

The issues raised above are consistent with the ideas I highlighted from IFAC Exposure Draft 17 – Professional Judgment – Emphasis on Understanding Facts and Circumstances. This is a key area of understanding for students at paper 15. The paper is concerned with the application of understanding and judgment to scenarios raised in the questions and students are expected to show that they are applying professional judgment robustly. “Professional judgment involves the application of training, knowledge and experience taking into account the nature and scope of the professional activity being undertaken. When exercising professional judgment, it is important that the professional accountant obtains a sufficient understanding of the facts and circumstances known to the accountant to identify, evaluate and address threats to compliance with the fundamental principles.” Students should ensure that they are familiar with the debate around professional judgment and the ED 17 in their wider reading to contextualise the emerging debates around auditor conduct.

Professional scepticism

Professional scepticism continues to be an ongoing issue. The FRC in the UK regards the poor application of professional scepticism as core to compromising the ability of the auditor to robustly challenge management judgment and therefore a significant contributor to recent audit failures.

STUDENTS

Core challenges compromise the ability of an auditor to maintain a sceptical mindset. As boards strive to meet faster reporting deadlines, time pressue is increasing.

These include Carillion Plc, Thomas Cook Plc, Patisserie Valerie Plc and others. IFAC is currently reviewing its guidance on professional scepticism in order to meet public expectations and ICAEW has recently published a really helpful and practical insight into professional scepticism in the practice. This highlights some of the core challenges that compromise the ability of an auditor to maintain a sceptical mindset, including time pressure and a lack of situational context. As boards strive to meet faster reporting deadlines, time pressure is increasing. As audit clients become more complex and audit teams work against deadlines without really becoming immersed in the business, commercial factors seem to be conspiring to make being sceptical more difficult. An understanding and appreciation of the developing debate around scepticism is important to ensure that this final paper in audit embeds this critical skill area in students. Further information can be found at: ● www.ifac.org/system/files/publications/files/ Professional-Skepticism-Meeting-PublicExpectations-Consultation-Paper.pdf ● www.icaew.com/-/media/corporate/files/ technical/audit-and-assurance/audit-andassurance-faculty/publications/others/ scepticism-the-practitioners-take.ashx

Developments in international ethical standards

As all student accountants will be aware, the last few years have not been easy for the reputation of the profession. In the UK, the collapse of Carillion Plc was followed by months of media comment and a government Select Committee Report into the corporate failure. This lack of confidence in the ethics of accounting firms has driven the review of the functioning of the audit market and may see some substantial changes to audit practices over the next few years. This focus on the conduct of auditing firms is by no means limited to isolated cases of Big Four audits of public interest entities causing concern – and the problems relate to audits throughout the world. It is against this evidence of concerns over the quality of accounting ethics that the new International Code of Ethics for Professional Accountants was published last year and came into force on 15 June 2019. In December 2019, the Brydon Review – Assess, Assure and Inform was published. There are a number of very important developments to the new 2018 Code which, if adopted correctly, should do much to resolve some of the problems in ethics evidenced in recent scandals and to help to re-establish the reputation of the accounting profession. The IESBA launched the Code in April 2018 with the statement: “While the fundamental principles of ethics have not changed, major revisions have been made to the unifying conceptual framework – the approach used by all professional accountants to identify, evaluate and address threats to compliance with the fundamental principles and, where applicable, independence.”

The substantive revisions to the Code include: ● an enhanced conceptual framework, which includes extensive revisions to “safeguards” throughout the Code that are better aligned to threats; ● strengthened independence provisions regarding long association of personnel with audit clients; ● strengthened provisions relating to offering and accepting of inducements, including gifts and hospitality that apply to both professional accountants in business (PAIBs) and professional accountants in public practice (PAPPs); ● strengthened provisions dedicated to PAIBs, including: ● a new section relating to pressure to breach the fundamental principles; and ● revised provisions relating to the preparation and presentation of information; ● clarifications about the applicability of PAIB provisions to PAPPs; ● new material to emphasise the importance of understanding facts and circumstances when exercising professional judgment; and ● new material to explain how compliance with the fundamental principles supports the exercise of professional scepticism in an audit or other assurance engagements. Students are reminded that three articles regarding issues raised by the Code were published by AIA in the Student Accounting in July, August and September 2019.

Other issues

The Brydon Review has proposed a wide range of reform ideas to resolve the ongoing issue with audit and include: ● the inclusion of fraud analysis in the audit remit; ● a replacement of true and fair with present fairly in all material matters; ● a greater focus on going concern; ● a change to audit committee composition to include a wider range of members, not only those from the accounting profession, including those with ‘an enquiring mind and able to make robust independent decisions; ● an alteration in audit scope to extend to the directors’ statements regarding their discharge to the public interest; and ● the development of a new professional body –Corporate Auditing. Whilst the detail recommendations may be beyond the content of Paper 15, the issues that they debate represent the very real concerns and challenges facing the global profession and students should be familiar with these. The Brydon Review can be found at: bit.ly/3oMks7T. ISSUE 115 | AIAWORLDWIDE.COM

AUDITING

Rebuilding faith in audit

Stuart Cobbe considers the essential changes needed in the audit process to rebuild confidence and deliver business value.

Stuart Cobbe Director of Growth, Europe, MindBridge

identifying and managing risk. Shifting from an annual audit process that can only report after the fact to a near continuous, data driven approach will enable rapid, actionable insight. This article looks at the role of artificial intelligence, machine learning and risk-based audit in rebuilding faith in audit and providing businesses with tangible business value.

Overdue change

The audit industry must stay focused on the suggestions such as those from the recent Brydon Review into the audit market, that fundamental parts of the audit process must improve. Following the Wirecard scandal, calls for a more investigative and forensic audit are being echoed by the IDW, the professional body for auditors in Germany. Losing sight of these fundamental changes is a problem because traditional rules-based audit is outdated and inadequate to fulfil audit’s purposes, especially in a post Covid-19 economy. Audit’s methods have not kept pace with the growing level ISSUE 115 | AIAWORLDWIDE.COM

©Getty images/iStockphoto

he role and quality of audit has been under the spotlight in recent years following a string of high profile business failures – and the economic implications of Covid-19 have reinforced the need for change. From the initial economic freefall to the role of government financial support and the slow climb back towards business as usual – albeit in many cases based on fundamentally different models – balance sheets are fragile. Audit plays a vital role in safeguarding not only investors’ money but also a business’s wider stakeholders, including employees. Yet with traditional methodologies and outdated technologies, few auditors have the opportunity to identify balance sheet frailties in a time frame that will enable critical remedial action to be taken. A strategic change in the audit process is essential; a move from outdated, rules-based audit to a methodology focused on proactively

AUDITING of business complexity or the dissociation between investors and management teams. Nor has audit kept pace with the opportunity to use technology to support business – and that creates frustration for auditors. There has been a tendency to leverage technology to automate the checklists and rules that govern the way audit has been done, rather than to ask whether there are fundamentally different ways of approaching the audit. Automating the old ways are unlikely to mitigate the risk of business failure caused by the increasing complexity of businesses, a risk that Covid-19 has exacerbated. Why do we, as an industry, spend so much of our time ploughing through endless checklists and verifying run-of-the-mill invoices, rather than actively seeking the key areas of business vulnerability? Why spend time manipulating data to identify outliers rather than investigating those outliers and understanding their business implications? At what point does compliance get in the way of the talented people in our industry providing value and, in doing so, fulfil their duty to businesses, shareholders, and the wider public? There is an opportunity for auditors to avoid the daily frustration of working through a checklist and instead leverage their high level of knowledge and skills to interpret the key financial information of a business. One key barrier to this critical change is the resistance to invest in new technologies and the slow adoption of a risk driven, agile way of thinking about the work that needs to be done in order to provide assurance.

New economic imperative

In some ways, Covid-19 is acting as a catalyst for this essential change. Business models have been turned on their heads and revenue streams radically transformed. New risks have emerged, and many balance sheets are unrecognisable. Covid-19 has accelerated trends towards a greater digitisation within businesses and will exacerbate problems with auditing complex organisations whose value is largely composed of intangible assets and human capital. CFOs need to rapidly understand the new business landscape and identify priority areas of risk. How confident, for example, are firms in their use of the government’s financial support? From the accuracy of furlough claims and the challenges of repaying deferred VAT payments and loans, to the risk of these funds being misappropriated by employees in personal financial distress, government funding has created both a lifeline and a new set of operational challenges. These challenges are laid on top of worries around valuing assets which are increasingly fluid and hard to pin down.

Data driven value

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deliver real business value, and the audit industry should embrace this role. Sophisticated machine learning and artificial intelligence techniques can enable auditors to rapidly surface business risk by identifying areas of unexpected activity. Critically, unlike humans who see what they expect to see, intelligent technologies allow the data to speak for itself. The algorithms will simply work through the data, finding patterns and revealing insight that would be impossible to discover manually. Replacing checklist driven investigation with a risk-driven, machine learning enabled investigation provides the foundation for a new level of audit confidence, as well as business insight. Whether it is identifying errors, flagging unexpected trends in invoice realisation or revealing potential employee fraud, audit firms embracing a data driven, risk focused methodology can rebuild corporate faith in the quality and value of the audit process. Critically, it supports a long overdue shift away from the annual cadence of audit, recognising that although annual audits can do the job, they are often too late to be relevant to key stakeholders. Companies have steadily moved from quarterly to monthly reporting, and then to daily reporting, often using real time data for their internal reporting. There is no reason, beyond characteristics in the audit market, for this to be the case for external audit as well. Companies require rapid insight and auditors must consider how their work for clients can be more timely and more valuable. From developing new service lines to reconsidering operating models, there is a significant opportunity to deliver greater value to the world economy through enhanced, timely business understanding.

There is an opportunity for auditors to avoid the daily frustration of working through a checklist and instead leverage their high level of knowledge and skills to interpret the key financial information of a business.

Innovation and differentiation

For auditors, this shift in approach provides the opportunity to redefine audit and discover a new role in the market. This is not about leveraging robotic technology to automate audit processes and reduce the workload. It is about providing auditors with a way to effectively address the challenges and complexities of modern business models and deliver real value. In some cases, the data may reveal the need for more work; in others, the audit process may be streamlined. Risk based audit moves away from a one size fits all approach to one that truly reflects the state of each individual client’s business. Audit data becomes relevant, meaningful and valuable. Technology, however, is only an enabler. While the market dynamics of audit still remain under review, firms need also to shift the focus and pay far more attention to those companies that are complex or high risk, companies whose fortunes affect the performance of thousands of pension plans and individual investment portfolios. Those audit firms that are actively pushing to deliver more value to clients, to improve the quality of and confidence in audit, and to minimise risk across the board are at the heart of what should become an inexorable shift to this new audit model. ●

Author bio

Stuart Cobbe is Director of Growth, Europe at MindBridge, helping finance professionals to embrace data driven decision making through artificial intelligence.

FINANCIAL ACCOUNTING

A new normal 2021 will usher in an era of change for financial accountants. Scott Dietz discusses areas open to significant exposure. Scott Dietz Director, Regulatory and Accounting Solutions, Moody’s Analytics

hat is the outlook for the coming year? Not since the 2008 financial crisis has the answer to this question been so unknown. Any discussion around 2021 must start with how the pandemic will continue to affect – and change – how companies operate.

Covid-19 fallout

For some nations, the return to pre-pandemic economic levels may not occur until the middle of the next decade. 16

The impact of the coronavirus on economies will be felt for years to come. Economic forecasts from Moody’s Analytics, published in 2020, noted that for some nations the return to pre-pandemic economic levels may not occur until the middle of this decade. These impacts will be felt in accounting as 2021 progresses. While many businesses have so far been able to withstand the financial challenges, helped by fiscal policy measures and government stimulus, the expectation is that the severity of business and consumer losses will come more sharply into focus. This will generate many questions for those in the accounting space around what level of allowances and reserves should be maintained on existing and new loans, as well as investments. That the recovery is now being projected to last for such a long time will only compound the challenges placed upon accountants to justify their allowance estimates. As an example, for those in the banking and insurance industries there are new questions about what effect the pandemic will have on commercial real estate investments. Both industries have been heavily invested in the commercial real estate market, particularly in urban areas across the globe, as it has been considered a steady and sound investment. However, some expect the commercial real estate market to be the most affected over the long term by the pandemic, including immediate impacts to the values of office, retail, and hotel spaces. Over the next year, as losses emerge, that long-term picture will begin to get clearer. Decision makers in these industries will need to consider all of their future investment options, including whether to stay in the commercial real estate market.

Any time such changes are considered, it leads to uncertainty and questions from investors which financial accountants will need to address. As collateral values decrease significantly, what will that do to asset values and possible impairments? In the insurance industry, these investments are often tied directly to liability matching. What effect will this have on other asset liability management programmes?

Financial reporting and ESG concerns

Environmental, social and governance (ESG) considerations are expected to really begin driving change in accounting and financial reporting in 2021. When we look at social factors, such as how a company is working to better its community, investors are asking for disclosures about these plans – as well as updates on how the company is progressing in its ESG efforts. At the Financial Accounting Standards Board’s (FASB) November Investor Advisory Committee ISSUE 115 | AIAWORLDWIDE.COM

FINANCIAL ACCOUNTING asking companies to demonstrate how they are managing ESG risk in their supply chain, and are expecting organisations to put measures in place to effectively address their know your customer (KYC) requirements in relation to ESG. An example of how this can affect an accountant in the banking world is to look at loan reserves for large clients. While banks may have a successful history with a particular customer, what happens if they are slow to adopt ESG measures? Not only are there the traditional pressures on measuring risk, but also external pressures that may now present just as much risk.

Remote work to amplify adoption of technology

From a technology perspective, as a result of the pandemic, accounting departments were quickly forced to work remotely and operate away from their usual environment – often without their usual tools. Accounting departments had to become more technologically savvy, with many moving away from desktop-based tools and onto cloud-based solutions that can interact with one another more effectively; for example, calculation tools that are capable of connecting to a general ledger system without paper or files that require manual signatures. Technology budget allocation will be under review next year as companies reflect on how things went and consider how they want to operate going forward. Another challenge, which often gets overlooked, is the accounting process itself. Financial accountants operate within processes that require controls and documentation, which are highly regulated both internally and externally. As the work shifts from the office to a remote environment, these processes must be revisited. New control procedures will be needed and in some cases control frameworks will need to be rethought.

meeting, investors specifically highlighted the need for additional reporting and disclosures of what companies are doing for ESG and how they are factoring it into their planning. Given that little official guidance exists from standard setters around how ESG reporting must be presented and what those disclosures should look like, financial accountants will be responsible for articulating disclosures to investors. While many organisations have already started to incorporate these risks into their financial reporting, companies will be watching closely how new regulations on climate risk will impact their financial reporting in 2021 and beyond. As ESG factors come to the fore for the accounting world, another important change will be the need to know your customers and your supply chain, specifically to identify any associated ESG risk. Similar to other ESG questions, investors are AIAWORLDWIDE.COM | ISSUE 115

Author bio

Scott Dietz is a Director at Moody’s Analytics, with over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.

There are more traditional accounting changes looming in 2021, perhaps nowhere more than in the insurance industry, which is facing significant adjustments to accounting standards on both sides of the balance sheet. Internationally, the IFRS 17 and IFRS 9 standards will become effective for insurers in 2023 while in the US, long duration targeted improvements will also take effect for public companies, then alongside current expected credit losses for non-public filers. For the insurance industry, the clock is ticking on preparing for these changes. 2021 will be a significant year for preparation and testing to ensure they have the right processes and systems in place to efficiently produce financial statements under the new standards. ●

©Getty images/iStockphoto

Know your customers and suppliers

Shrinking timelines and looming deadlines

SELF EMPLOYMENT

Self-employment: what lies ahead? Richard Hepburn takes a closer look at some of the major events that will affect the self-employed in 2021.

ith 2021 now in full swing for the self-employed, there are a few things to keep in mind as the new year brings several obstacles to navigate. In this article, we take a closer look at some of the major events that will affect the self-employed in 2021 and offer some insight into how contractors and freelancers can better prepare for the new year and the challenges it might bring.

Richard Hepburn Operations Manager, Gorilla Accounting

Brexit

The transition period ended on 31 December 2020, and although businesses had been urged to prepare for Brexit, it’s still quite unclear what this means for freelancers and contractors. Despite the closed deadline, it’s still not entirely known what will happen to trade between the EU and the UK. What’s clear is that some things have changed, be it regarding goods and services or the movement of people: ● UK businesses are no longer required to complete an EC Sales List when supplying services to businesses located in the EU. ● All supplies of digital services to consumers in EU member states are liable for VAT in the consumer’s member state. ● If you receive personal data from people in the EEA and EU, you may have to ensure that you can continue to use it in 2021. ● You must also ensure that your qualifications are still valid in the EU and recognised by firms and organisations there if you plan on working with EU countries.

IR35

April 2021 will come with changes to the current IR35 legislation. IR35 is also called intermediaries legislation – according to the government, an intermediary is usually a limited company that “will normally be a worker’s personal service company but could also be a partnership, a managed service company, or another person. A worker is sometimes known as a contractor.”

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Author bio

Richard Hepburn is Operations Manager at Gorilla Accounting with experience in the contractor accounting sector.

While IR35 was first introduced in 2000, it has been criticised by business owners and tax experts since then. This is because the legislation is difficult to understand, is considered to be badly implemented by HMRC and has caused issues for many contractors across the nation (some of them pretty high profile). It’s important that you understand off-payroll working rules and what’s going to change in the new tax year. Currently, in the public sector, the client decides your employment status, but you decide your own status if you work in the private sector. After 6 April 2021, any private sector clients classed as medium or large entities will decide your employment status and, if you’re within IR35, you’ll have to pay the adequate tax and National Insurance contributions. However, contractors and freelancers are likely to be in demand due to the shift caused by the pandemic. Companies may prefer to hire someone they don’t need to train and who’s ready to start work immediately; they may also want to hire contractors and freelancers for a specific project instead of taking on a new employee and paying a salary.

Coronavirus

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SELF EMPLOYMENT Key deadlines for 2021

As a contractor or freelancer, you have many important deadlines and dates to keep in mind. Submitting returns late will incur penalties, so you must stay on top of your self-employed calendar if you don’t want to end up paying more. A UK tax year runs from 6 April to 5 April of the following year, so we’re currently in the 2020/21 tax year. The following dates may not apply to everyone, but the ones that do will help you to take action without delays. ● 31 January 2021: The first payment on account is due by the end of January, and you need to submit your self-assessment tax returns by this date. You must also pay what you owe by 31 January 2021. ● After 5 April 2021: If you’re required to file a tax return when the tax year ends, you’ll receive notice soon after this date. Another thing to keep in mind is that if you’ve recently become self-employed, you have to register with HRMC for tax and National Insurance. ● 31 July 2021: The second payment on account is due on this date. Due to the coronavirus, this second payment (for the tax year of 2019/20) was deferred until 31 January 2021. ● 5 October 2021: You have until 5 October of next year to register for self-employment with HMRC. ● 31 October 2021: This is the deadline for paper tax returns and any paperwork sent after this date will incur a penalty. for contractors and freelancers who worry about their business and financial situation once the new year hits. So, what do you need to know about this?

Furlough scheme

The furlough scheme will be extended until the end of April 2021. The government will continue to pay up to 80% of an employee’s usual salary, up to £2,500. Those who have been made redundant after 23 September can be hired and put back on furlough. With 80% of income continued to be covered by the government, there is some breathing space for employees and businesses. It was hugely important to people across the country that the government provided an adequate level of support and, through this extension, they have gone some way to achieving that.

Job Support Scheme

Because the furlough scheme was extended due to the recent second lockdown, the Job Support Scheme has been postponed. This scheme was set to start on 1 November 2020 and meant that the government would pay up to 67% of the wages of employees. This is useful for businesses like pubs and restaurants which have been impacted heavily each time they have been forced to close. The government has since withdrawn the Job Support Scheme.

Business rates relief

You may be eligible for business rates relief because of the Covid-19 pandemic. If your business is in retail, hospitality, leisure or even a nursery, you may be able to get this relief, which means you won’t have to pay business rates for the 2020/21 tax year. AIAWORLDWIDE.COM | ISSUE 115

Local councils will automatically apply the discount, so you don’t have to sign up for anything.

VAT payments

If you deferred your VAT payments between 20 March and 30 June 2020 due to being unable to make them, the government allows for some more breathing space. You can: ● pay what you owe in full on or before 31 March 2021 now; or ● opt into the new VAT deferral payment scheme that will launch in 2021. You’re still unable to opt into the new payment scheme, as this will only be available in early 2021. However, once possible, you will have the opportunity to make up to 11 smaller monthly instalments that are interest free, and which have to be paid by the end of March 2022. HMRC says that to be eligible for the new scheme, you must: ● have deferred VAT; ● be up to date with your returns; ● opt in before the end of March 2021; ● pay the first instalment before the end of March 2021; and ● pay the deferred VAT by Direct Debit.

Bounce back loan

As a sole trader, you may find it difficult to pay your self‑assessment bill. You can set up a payment plan to spread the cost over a period of time.

This loan helps small businesses to access finance more easily and quickly during the pandemic. Small and medium-sized businesses can borrow between £2,000 and up to 25% of their turnover, with the maximum loan amount being £50,000. Businesses now have the option to repay the loan over a period of up to ten years. There are no fees or interest to pay for the first 12 months – after that, the interest rate is 2.5% a year.

Innovation grant

The government is also helping SMEs focused on research and development by offering access to £750 million in grants and loans.

Corporation tax

HMRC may wave penalties and fees for late filings if there’s a reasonable excuse. While this is not guaranteed, you may be able to get a respite if you contact the government; so, if you’re having problems with submitting your return on time, let them know.

Self-Assessment

As a sole trader, you may also find it difficult to pay your self-assessment bill. If this is the case for you, you can set up a payment plan to spread the cost over a period of time, allowing you to breathe a little more easily. Not everyone is eligible for this. To benefit from this payment plan, you must: ● owe up to £30,000 on your self-assessment tax bill; ● not have other payment plans or debt with HMRC; and ● have your tax returns in order and up to date. ● It also needs to be less than 60 days after the payment deadline for you to qualify. ●

TECHNOLOGY

Software options for accountants James Byrne examines the factors that come into play when you are choosing your accounting software and the company that will provide it.

hen you’re looking for software to help manage your practice, you’re likely to find familiar, global names and younger, independently owned software. Corporations have thousands of employees, multiple kinds of software and substantial financial investment. So, why would you entrust your practice to an independent?

Big corp. Big prices

It seems the more well-known the logo, the higher up your eyebrows go when you see the cost. (All those employees, offices and investors need funding, after all.) Often, pricing is also based on the size of your practice and the features that the software provider assumes you’ll need, rather than one price and access to every area of the software.

Length of contracts

Long-term contracts are the norm for larger companies, locking you in whether you’re finding value or not. Independent software companies may need your money more – and would love to lock you in forever – but user satisfaction and retention are also more critical. Their success relies more heavily on your success. As such, independent software companies will keep a closer eye on adoption rates and the success of their users’ businesses – and review their performance more regularly.

Additional costs for training and support

Charging for implementation, training and ongoing support isn’t restricted to software owned by large companies, but there’s certainly a trend. Paying for training increases the overall cost and puts you at risk of lost expenditure if you and your team don’t get on with the software. It may also signify complexity and a user experience that’s not too intuitive – though that’s not always the case.

James Byrne CEO, AccountancyManager

You’ll always be more important to an SME than to a corporation – and that’s exactly how they should make you feel if you need a hand. With a small-to-mid size independent company, you’ll probably know the support team by name and they’ll know all about how you use the software. The larger the company providing the software, the more support staff they’re likely to have, leading to less personalised support and, weirdly, longer wait times. Consider what role support has in the business too. With an independent vendor, the support team will probably work directly with the development team – adding to the agility and speed of development.

The impact of investors

Independent software is always looking to grow, both in capability, user base and team size. That means they’re more likely to invest the profits back into the business to keep improving. No outside investors means that independent software owners only answer to you. Yes, corporations have more funds, but arguably this could lead to decisions that don’t put you first.

The speed of development

A large company means many levels of hierarchy and many stakeholders. Projects take longer to get sign-off and updates to the system are slow to emerge. Although new features may come from user feedback, the final decision will be made at a much higher level. Smaller, independent companies are more agile and able to turn system improvements and additions around in a matter of days.

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TECHNOLOGY Your impact on shaping the software

Quite a few independent software vendors in the accountancy industry were founded by accountants that ran their own practices. As such, these platforms solve the same frustrations you experience every day – and continue to respond to existing and emerging pain points. This means that the feedback and suggestions loop between the users and the development team must remain strong. Perhaps the biggest benefit of using independent software is the impact you can have on its future. Imagine giving Google or Microsoft a call and asking for a new feature. (If you find a phone number, let us know.) You’ll find that independent software companies maintain a closer relationship with their users, both in providing support and listening to opinions.

A focus on accountancy and bookkeeping Many of the big-name brands cater to all kinds of industries and often specifically target large companies (which goes some way to justifying the high prices). This means accountants and bookkeepers in practice may not be central to their investment and strategy.

Author bio

James Byrne is CEO and founder of AccountancyManager, a multi award-winning practice management software built to reduce back office administration for accountancy firms.

What I see in Facebook groups of accountants is the amount of hacks and bodges they’ve got. They have maybe 15 or 20 different systems loosely talking to one another, when they could have five core systems that are fully integrated. Andy Sullivan, Complete HQ Everything you need – in one place

You might sign up to a few well-known tools to perform specific tasks, such as managing your deadlines and workflow, sharing files, e-signing documents or emailing your clients. Then develop a “system” within your practice where you sign in and use multiple pieces of software for different things – probably keeping track of everything in good old Excel. With independent software built by accountants, you’re likely to find many of these features included. On a Facebook group for accountants this week, a list of software was offered up as an “ideal solution”. This included HelloSign (owned by Dropbox) and Sharefile (owned by Citrix). These are great at what they do, but there are a few disadvantages to using disparate software, not designed specifically for accountants and bookkeepers. The overriding problem is that all your client data, internal tasks and communication with clients are in different places. As well as adding hours of time keeping track of each software, this method exposes you to human error, forgotten deadlines and miscommunication across teams.

Part of your community

For independently owned software, the prioritisation of personal partnerships extends beyond their user base. Quite often, the founders and owners of independent software will build relationships with each other and other thought leaders, actively participate in events and liaise directly to discuss potential integrations. Again, this speeds up the time to release and combine knowledge to build the best software for their shared users. With large corporates, or software not designed for accountants, these partnerships are much harder to make. ● Try AccountancyManager free for 30 days: Give AM a test drive for 30 days. You’ll find plenty of videos and walk-throughs to help and we’ll give you a personalised demo too. We don’t ask for bank details upfront, transferring your data from another platform is easy and you’re welcome to give us a call with any questions on 01926 355 366.

AIAWORLDWIDE.COM | ISSUE 115

INHERITANCE TAX

The future of inheritance tax With Covid-19 forcing governments worldwide to look at tax increases, Dennis Petri asks whether inheritance tax is in line to rise. Dennis Petri Chairman, UHY International

he bill for Covid-19 tax reliefs, furlough schemes and economic stimulus packages is shortly coming due for governments around the world. Every finance minister is being forced to look at how they will address enormous deficits that could not have been imagined 12 months ago. Increasing rates or reducing reliefs on inheritance tax will certainly be under consideration in many economies. What does the current global picture of inheritance tax rates look like, and should inheritance tax be a prime target for tax increases in 2021 and beyond?

Inheritance tax rates

At UHY, we produced a study of inheritance tax rates across 28 countries in the UHY network

before the pandemic. The study compared the “inheritance tax” paid on $3 million of cash. The calculations are based on the deceased having two heirs receiving an equal share – both adult, non-dependent children. Both the deceased and heir are tax residents in the country. The study found that, overall, those inheriting wealth in G7 and EU economies are taxed on average at a rate 10 times higher than those inheriting wealth in emerging economies. Individuals in G7 countries pay an average of 16.8% ($503,321) and those in EU countries pay an average of 10.9% ($325,775) in inheritance tax when passing on $3 million in cash to their beneficiaries. In comparison, individuals in emerging economies pay an average of just 0.9% ($28,429) when passing on $3 million in cash. ISSUE 115 | AIAWORLDWIDE.COM

INHERITANCE TAX loved ones. Why keep working hard if so much of the money you make is taxed? Some argue that taxes on inheritance burden families at a time when they are dealing with a bereavement, and contribute to family assets – homes and businesses among them – being broken up and sold to cover the tax bills. However, the strength of these arguments may weaken in the face of the sheer size of the deficits that need to be addressed. Tax revenues will need to be found somewhere and difficult choices will have to be made. Will governments choose to increase taxes on businesses’ profits when they are already laying off staff? Should they institute a wealth tax? Should they tax capital gains at the same rate as income? Increasing inheritance tax may be easier politically than some of the alternatives.

Economic growth

The disparity is also reflected in lower value bands. EU individuals pay on average 3.8% ($13,320) in inheritance tax on $350,000 in cash versus an average of 0.7% ($2,326) in emerging economies. Similarly, average inheritance tax rates in the EU on $750,000 are 5.0% ($37,358), compared to 0.7% ($5,604) in emerging economies.

The arguments surrounding inheritance tax The arguments against such high rates of inheritance tax are clear. They can discourage entrepreneurs from building wealth as they face high income tax throughout their career, followed by high inheritance charges for their AIAWORLDWIDE.COM | ISSUE 115

Author bio

Dennis Petri is chairman of UHY International, a partner in UHY LLP and a managing director of UHY Advisors MI, Inc. He also serves as international liaison partner.

It makes for a stark contrast to compare the economic growth rates, according to the International Monetary Fund, (pre-pandemic, at least) of the high tax and low tax economies in our study when it comes to inheritance tax. Among the countries in our study with the highest rates of inheritance tax on a cash inheritance of $3 million are some of the major economies of Europe – France, Germany, the Netherlands and the UK. Each saw annual GDP growth of 1.7% or less in 2019. Japan, the highest inheritance tax economy in our study, grew its GDP by just 0.7% that year. By comparison, many of the countries in our study with zero rates of inheritance tax on a $3 million estate – China (6.1% GDP growth), India (4.2%) and Malaysia (4.3%) – were much faster-growing economically in 2019. While it’s clear that high rates of inheritance tax do not by themselves cause slow economic growth, it is not hard to make the argument that the ability to pass on assets to the next generation without high levels of tax incentivises entrepreneurs to grow businesses, increases employment and creates wealth. When considering inheritance tax increases, governments around the world must also assess the risk of pushing high net worth individuals to leave for countries that they might see as more welcoming from a tax perspective. Looking at our study, it is not only emerging economies that present a threat in that regard. Australia, New Zealand, Portugal and many states in the US can all offer the quality of life that wealthy individuals seek, while not levying any inheritance tax at all on a $3 million estate. Ultimately, the choice of whether to increase rates of inheritance tax to pay for the costs of the pandemic is a political one. Governments around the world should consider the full costs before they make their decision. What they gain in tax receipts in the short term may be outweighed by a heavy inheritance tax burden’s contribution to slower economic growth in the longer term. ●

RISK ASSESSMENT

Avoid the risk of exploitation

The AIA Compliance team examine the circumstances where there might be a high risk of money laundering or terrorist financing in the accountancy sector

he impact of money laundering is devastating – it enables serious organised crime such as modern slavery, drugs trafficking, fraud,corruptionand terrorism. A comprehensive risk assessment is key to understanding the money laundering and terrorist financing risks that a business is exposed to. By knowing and understanding the risks to which the accountancy sector is exposed, HM Government, law enforcement and the professional body supervisors, as well as the accountancy firms themselves, can work together to ensure that criminals find it difficult to exploit accountancy services.

The overall risk of money laundering and terrorist financing

The Economic Crime Plan identifies economic crime as a significant threat to the security and the prosperity of the UK. Its impact is felt across our society. Fraud is now one of the most common crimes in the UK, with one in 15 people falling victim a year. Money laundering enables criminals to profit from some of the most damaging crimes. Bribery and corruption undermine fair competition and are barriers to economic growth. The National Risk Assessment of Money Laundering and Terrorist Financing 2020 (NRA) states that accountancy services remain attractive to criminals due to the ability to use

ISSUE 115 | AIAWORLDWIDE.COM

RISK ASSESSMENT them to help their funds gain legitimacy and respectability, as implied by the accountant’s professionally qualified status. The accountancy services considered most at risk of exploitation continue to be: ● company formation and termination; ● mainstream accounting; and ● payroll. The NRA also highlights other risk areas, which we have incorporated into the risk sections below. The NRA concludes that accountancy services are at highest risk of being exploited or abused by criminals when the accountant doesn’t fully understand the money laundering risks and does not implement appropriate risk-based controls. These risks can be well-managed through effective anti-money laundering policies and procedures, in line with the Anti-money Laundering Guidance for the Accountancy Sector. Firms should tailor their anti-money laundering policies and procedures to address the risks present in a particular service lines or clients.

Key risks relevant to the accountancy sector

The risk of money laundering and terrorist financing is constantly evolving. Firms should regularly review the risk outlook to make sure they have identified all the areas relevant to their own business – particularly as the risk may evolve because of changes to the firm’s client base, geography and services provided. The risks listed here are not exhaustive. You may identify other circumstances particular to your firm, where there might be high risk of money laundering or terrorist financing. This document is intended to help the firm understand its exposure to risk and ensure that it has designed and applied the right procedures to mitigate that exposure.

Customers

As part of the firm-wide risk assessment, the firm should identify the type of clients that it serves. The firm must consider the risk posed by its clients by identifying whether they present any of the following risks: ● clients seeking anonymity or undue secrecy; ● clients with a history of criminal activity; ● new clients outside of your normal client base; ● new clients – professional advisors; ● politically exposed persons; ● cash based businesses; ● other sectors highlighted by the NRA; ● clients with a changing business or involved in emerging sectors; and ● high net worth individuals. AIAWORLDWIDE.COM | ISSUE 115

Firms should reinforce the importance of an “enquiring mind” and employing professional scepticism – both in terms of the client due diligence performed and the scrutiny applied to the ongoing services provided.

Countries or geographies

The firm should consider whether its clients are established in countries that are known to be used by money launderers or terrorist financiers, or whether another of the parties to the transaction is established in such a country. When determining geographic risk, factors to consider may include the perceived level of corruption, criminal activity and the effectiveness of money laundering and terrorist financing controls within the country. These include: ● countries that do not have effective money laundering and terrorist financing controls; ● countries with significant levels of corruption; and ● countries with organisations subject to sanctions.

Products or services

Criminals are attracted to the accountancy sector as a way of giving legitimacy to businesses that are a front for money laundering. Accountancy services may be used to create corporate structures or help to legitimise the movement of proceeds of funds. The following products or services may be at high risk of being used for money laundering or terrorist financing: ● trust and company services; ● legitimising books and records; ● payroll services; ● insolvency services; ● tax advice that leads to a reduction in tax liability; ● tax investigations where there might be a criminal element; ● investment business; ● probate and estate management; and ● central and local government support schemes.

Transactions

Most accountancy services do not involve the facilitation of transactions. However, the following area may be at high risk of being used for money laundering or terrorist financing: clients’ money bank accounts. There is a risk posed by accountants performing high value financial transactions for clients with no clear business rationale, allowing criminals to transfer funds through the client’s money account. Accountants should not allow their client account to be used as a banking facility and should understand the rationale for why the client is using the firm’s clients’ money bank account before the transaction is initiated.

RISK ASSESSMENT

Conducting a comprehensive risk assessment is key to understanding the money laundering and terrorist financing risks that a business is exposed to. Delivery channels

The way in which the firm provides its services to its client will affect the risk to the firm. Things to watch include: ● clients that you haven’t met; ● combining services: some services might not be inherently high risk, but when combined with other services or transactions become risky; and ● combining factors: risk will increase where multiple risks are present in one client or engagement.

Case studies

The following case studies illustrate the importance of having a consistent approach to compliance with the Money Laundering Regulations. They have been constructed in collaboration with experienced financial investigators and give a stark warning of the possible consequences of involvement in money laundering, whether complicitly or through failing to ask the correct questions or not understanding the simple rules which create a robust internal control system.

Failure to report suspicion of money laundering

“R” provided tax and accountancy services between January 2009 and November 2013 to limited company “C”, a supplier to the National Health Service. During this time, HMRC started an enquiry into the corporation tax return of the company, which continued into November 2013. Early in November 2013, the sole director and shareholder of the company told R that tax specialists had been engaged to deal with HMRC. He also disclosed that there had been an over-claim for mileage expenses submitted by that director, which the same specialists were also dealing with to negotiate a settlement with HMRC. R ended the business relationship with the company at this time. In July 2014, R was interviewed under caution by police, where it was disclosed that the director had been involved in a large fraud against the NHS, involving the issue of false orders by company C and an NHS employee. R was charged with failing to disclose knowledge of the over-claim for mileage expenses which had been mentioned. There was no evidence that R was involved or knew about the fraud, but

R was convicted of a single offence under the Proceeds of Crime Act (POCA) 2002 s 330 and was sentenced to a fine of £5,000 and a victim surcharge. R had been in practice for over 25 years and the seriousness with which this case was taken illustrates why information coming to those in the regulated sector needs to be effectively assessed and dealt with. Under s 330 it is a criminal offence in England and Wales to know, suspect or have reasonable grounds for suspecting (during business in a regulated sector) that another person is engaged in money laundering and to then fail to disclose that to a “nominated officer” in the business.

Tax evasion

Accountant “L” was responsible for a successful firm with over 5,000 clients, many of which were based in the media and entertainment business. Investigations by HMRC led to the arrest of “L”. A search of business premises revealed the use of inflated accountancy fees and fraudulent use of trading losses in the submission of tax returns intended to assist in the evasion of tax. The clients were unaware of the issues and were allowed to settle with HMRC with an estimated £20 million to be recovered in settlement of outstanding tax positions. L was convicted of four counts of cheating the public revenue and sentenced to five years in prison. In addition, HMRC commenced confiscation proceedings to strip L of any financial gain made as a result of the criminal activity. This is a fairly unique position in that L apparently used an extensive, wealthy client base to further criminal purposes. However, it illustrates that under the POCA 2002 a person can launder the proceeds of their own offending and that the proceeds of criminal activity can take many forms (in this case the £6 million subject of the four charges, all of which the clients were apparently unaware of). Equally, for those innocent individuals who find themselves in the midst of a Law Enforcement Money Laundering Investigation, the experience is intense and unlikely to be pleasant. New AML Guidance for AIA Members New anti-money laundering guidance produced in collaboration with the Metropolitan Police is available for AIA Members in Practice. Many accountants will come across suspicious activity in their preparation of yearend accounts and general business relationships with clients and it is important to recognise the warning signs of money laundering. Money laundering is often linked to other serious organised crime such as drug trafficking, modern slavery and human trafficking: spotting and reporting suspicions can help to tackle economic crime. For further information, see bit.ly/3oCYmUo. ISSUE 115 | AIAWORLDWIDE.COM

Events UPCOMING WEBINARS

AIA-NCA workshop: creating good quality SARs Speaker: Tony Fitzpatrick, NCA and David Potts, AIA 10 February 2021 Accountants have a crucial role to play in protecting the economy and wider society by submitting suspicious activity reports (SARs). A high-quality SAR can provide a critical intelligence resource for law enforcement and be instrumental in identifying money laundering. By flagging up your suspicions, you are playing a key role in tackling criminality. But what should you be looking for? In this joint workshop with the National Crime Agency, Tony Fitzpatrick of the UK Financial Intelligence Unit will cover how to make good quality SARs. There will also be an opportunity to ask questions. In addition, the session will introduce AIA’s new member guidance publication “Red Flags: spotting and reporting suspicious activity”, which addresses: ● reporting obligations for firms under the Money Laundering Regulations; ● how to spot and report suspicious activity; ● knowledge vs suspicion; ● what could happen if you fail to report suspicious activity; and ● how to submit good quality SARs. The issues raised in the session will help you to critically assess your existing processes and identify improvements. Making Tax Digital for Income Tax Speaker: Aiden Corcoran 15 February 2021 Making Tax Digital for Income Tax will be with us in 2023, but why should you start to prepare your clients now and move away from HMRC’s Portal? This webinar will include:

● how to help your clients get ready for the transition; ● timelines: payments and submissions; ● an overview of GoSimpleTax software; and ● a question and answer session.

Financial reporting update: Ireland Speaker: Professor Robert Kirk 23 February 2021 Financial reporting covers a number of standards. This webinar will review FRS102 and will cover: ● the latest developments in both local and international financial reporting standards; ● Auditing and Accounting Supervisory Authority (IAASA) observations for reporting on December 2020 year ends; and ● the impact of Brexit and Covid-19 on financial reporting. Pension update: Ireland Speaker: James Caron 12 March 2021 Pension planning, broadly speaking, falls into two regimes: personal pensions and company/director pensions. This webinar will include: ● pension planning opportunities in Ireland; ● corporate wealth to private ownership; ● case studies; and ● a question and answer session. For all events and webinars, visit www.aiaworldwide.com/events for more information and registration.

CPD on demand Have you missed out on AIA’s recent CPD Webinars? Our on demand content is delivered by industry experts and leading professionals, giving you the flexibility to learn and develop your skills where and when suits you best. Each webinar is worth one verifiable CPD unit and can be purchased through

the AIA shop. The following content is available now: ● AML Update: spotting and reporting suspicious activity ● Acting in the public interest ● De-mystifying the creditors voluntary liquidation process

● IR35 in the private sector: an initial assessment ● Payroll update: coronavirus and beyond Login to your AIA online account and choose “Shop” from the MyAIA menu.

To advertise in the next issue of

contact: advertisingsales@lexisnexis.co.uk AIAWORLDWIDE.COM | ISSUE 115

Technical INTERNATIONAL

IFAC releases new international standard support resources The International Federation of Accountants (IFAC) has released updates to two previously published international standard support resources: ● Agreed-Upon Procedures (AUP) Engagements: A Growth and Value Opportunity (the AUP Publication): This describes AUP engagements, when they are appropriate, and identifies key client benefits. It also covers AUP engagements on financial and non-financial subject matters, and provides six short case studies with example procedures that might be applied and two illustration AUP reports from ISRS 4400 (Revised). ● Choosing the Right Service: Comparing Audit, Review, Compilation, and AgreedUpon Procedures Services (the

INTERNATIONAL IFAC welcomes a new report on climate-related financial disclosure IFAC applauds the publication of “Reporting on enterprise value, illustrated with a prototype climaterelated financial disclosure standard”, a new report from leading sustainability and integrated reporting organisations CDP, CDSB, GRI, IIRC and SASB. The report represents another milestone in the journey to enhancing corporate reporting, and stands to advance the dialogue between companies and their investors and stakeholders through reporting of sustainability-related information. In September 2020, IFAC published The Way Forward, a call for the creation of an international sustainability standards board. Earlier this month, IFAC issued its response to the IFRS Foundation Consultation Paper on Sustainability Reporting, where it reiterated its view that the IFRS Foundation should establish a new sustainability standards board alongside the IASB, in order to focus on reporting requirements that address enterprise value creation, and to deliver at speed by leveraging the expertise and standards that

Brochure): This explains and differentiates the range of audit, review, compilation and AUP services which practitioners can provide in accordance with relevant international standards. It can help current and prospective clients to understand the range of services available, when they are appropriate, as well as their benefits. Both these resources have been updated to reflect the International Standard on Related Services 4400 (Revised), AgreedUpon Procedures Engagements, which was approved by the International Auditing and Assurance Board (IAASB) earlier this year and is effective for AUP engagements for which the terms of

already exist as a result of work that has been conducted by the CDP, CDSB, GRI, IIRC and SASB, as well as the TCFD. The report not only provides a valuable starting point for this IFRS initiative, but also clearly demonstrates the collaborative intent and effort of these organisations – now and going forward. IFAC encourages its members and stakeholders to respond to the IFRS Consultation Paper by 31 December. IFAC will continue to speak out on behalf of the global accountancy profession in support of a global solution for reporting sustainability information.

IFAC responds to IFRS Foundation Sustainability Reporting Consultation The International Federation of Accountants (IFAC) has submitted its response to the IFRS Foundation’s Consultation Paper on Sustainability Reporting, issuing a resounding “yes” to the question of whether an international sustainability standards board is needed to lead a coherent global system of interconnected corporate reporting that will rationalise the current fragmented ecosystem for sustainability information.

engagement are agreed on or after 1 January 2022. The demand for AUP engagements continues to grow as a broad range of stakeholders, such as regulators, funding bodies and creditors, use AUP reports for a variety of reasons. Flexibility is a key benefit of AUP engagements, as they can be tailored to different circumstances and focused on individual items of financial or nonfinancial subject matters. One of IFAC’s three strategic objectives is contributing to and promoting the development, adoption and implementation of high-quality international standards. There are numerous additional guidance and support resources available on the dedicated “Supporting International Standards” section of the IFAC Knowledge Gateway.

Reiterating the themes of its September 2020 call-to-action, Enhancing Corporate Reporting: The Way Forward, IFAC calls for the creation of the new board alongside the IASB under the IFRS Foundation. The proposed board would address the urgent and growing demand from investors, policy makers and regulators for a reporting system that delivers consistent, comparable, reliable and assurable information relevant to enterprise value creation, sustainable development and evolving stakeholder expectations. “This is a significant opportunity to bring new relevance to professional accountants’ work in corporate reporting and assurance and will advance the public interest,” said IFAC CEO Kevin Dancey. “The accountancy profession must continue to play an active role in helping companies, economies and societies achieve a more sustainable future, made all the more urgent due to the climate emergency. IFAC stands ready to engage with the IFRS Foundation, as well as our member organisations and other stakeholders, to ensure the success of this important initiative.” IFAC encourages its members and other stakeholders to review its response and engage in this important conversation with the IFRS Trustees. ISSUE 114 | AIAWORLDWIDE.COM

Technical IFAC releases latest Point-ofView: Embracing a People-centred Profession The International Federation of Accountants released their latest “Point-of-View” (POV): Embracing a People-centred Profession. The new publication explores the connection between the people in the accountancy profession, the core components of the profession (education, professional judgment, ethics, values) and the profession’s commitment to the public interest. “Our new POV focuses on the human aspect of our profession,” said Kevin Dancey, IFAC CEO. “Through this lens, we address issues such as gender equality, diversity (both of individuals and skills), work-life balance, mental health, and lifelong learning. “While many of the views expressed are not new, IFAC believes it is important to set out a clear message as the global voice of the accountancy profession.” In the POV, IFAC offers insights and guidance on how firms, organisations and PAOs can better understand and appreciate the benefits and challenges of a profession made up of individuals. IFAC also examines the relationship between a strong focus on “human capital” and the ability to attract, challenge and retain talented people throughout their careers. “Events like the Covid-19 pandemic remind us that ours is a profession powered by individuals,” Dancey continued. “Individuals with their own talents, backgrounds, aspirations and challenges. Recognising and appreciating the individual characteristics of professional accountants helps foster an environment where trust and judgment can thrive, and it is fundamental to the continued relevancy of the profession.”

IASB reviews package of IFRS Standards for group accounting The International Accounting Standards Board (Board) is calling for feedback on the IFRS Standards for group accounting – IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities. The Request for Information has been published as part of the Postimplementation Review (PIR) of these Standards. AIAWORLDWIDE.COM | ISSUE 114

PIRs are carried out to assess the effects of a new Standard after companies have applied the requirements for some time. IFRS 10 sets out requirements for the preparation of group – consolidated – financial statements; IFRS 11 addresses how to account for interests in joint arrangements; and IFRS 12 sets out the information to be disclosed in the notes to the financial statements about interests in other companies. These IFRS Standards have been effective for annual reporting periods beginning on or after 1 January 2013. The Request for Information seeks feedback on applying the Standards and on the information provided to users of financial statements. The Board will use the feedback on the Request for Information to determine whether any further action is required. Hans Hoogervorst, Chair of the International Accounting Standards Board, said: “Post-implementation reviews are an opportunity to check that our Standards do the job they were intended to do. I encourage all stakeholders to help us in the process by providing relevant feedback.” Further information about postimplementation reviews can be found in the Due Process Handbook. The deadline for comments is 10 May 2021.

UK AND IRELAND UK-adoption of Amendments for IBOR Phase 2 and Amendments to IFRS 4 The Secretary of State for Business, Energy and Industrial Strategy (BEIS), in exercise of the powers conferred by statutory instrument 2019/685*, adopted on 5 January 2021, the following amendments to international accounting standards for use within the United Kingdom:

1. Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)

The Amendments are effective for annual periods beginning on or after 1 January 2021, with early application permitted. The Amendments focus on the effects on financial statements when an entity replaces the old interest

rate benchmark with an alternative benchmark rate as a consequence of the global regulatory reform of key interbank offered rates (IBORs).

2. Extension of the temporary exemption from applying IFRS 9 (Amendments to IFRS 4)

The Amendments extend the expiry date of the temporary exemption from applying IFRS 9 Financial Instruments from 1 January 2021 to 1 January 2023, to align the effective dates of IFRS 9 with IFRS 17 Insurance Contracts for entities within the scope of the exemption. *The International Accounting Standards and European Public LimitedLiability Company (Amendment etc.) (EU Exit) Regulations 2019, No. 685, regulation 6(1).

FRC launches consultation to revise UK quality management standards The Financial Reporting Council (FRC) has launched a consultation on the proposed revision of the standards for an audit firm’s responsibilities to design, implement and operate a system of quality management. The FRC proposes to adopt: ● International Standard on Quality Management (UK) 1 “Quality Management For Firms That Perform Audits Or Reviews Of Financial Statements, Or Other Assurance Or Related Services Engagements”; and ● International Standard on Quality Management (UK) 2 Engagement Quality Reviews. It also proposes to revise International Standard on Auditing (UK) 220 (Revised 2021) Quality Control For An Audit Of Financial Statements, to reflect recent revisions to the international standards on auditing issued by the International Auditing and Assurance Standards Board (IAASB). The changes introduce a new quality management approach that is focused on proactively identifying and responding to risks to quality. This new approach requires a firm to customise the design, implementation and operation of its system of quality management based on the nature and circumstances of the firm, using an integrated approach that reflects upon the quality management system as a whole. The FRC has strongly supported the IAASB’s work.

Technical When finalised, the quality management standards are proposed to be effective, in line with the international standards, for audits of financial statements for periods beginning on or after 15 December 2022. The early adoption of these revised standards is strongly encouraged. The FRC is not proposing to add any new UK requirements, given that the IAASB has sufficiently addressed matters raised by the FRC in its comment letter on the IAASB’s Exposure Draft. The FRC is at the same time consulting on conforming amendments to other UK standards. The consultation runs until Friday 19 March.

Amendments to accounting standards: UK exit from the EU and IBOR Phase 2 The Financial Reporting Council (FRC) has issued “Amendments to UK and Republic of Ireland accounting standards – UK exit from the European Union”. The amendments update UK and Republic of Ireland accounting standards for changes in legislation following the UK’s exit from the European Union that come into effect at the end of the Transition Period. The amendments are limited to those necessary to ensure consistency with UK company law and largely update legal references and terminology used in the standards. The effective date for the amendments is accounting periods beginning on or after 1 January 2021, with early application permitted for UK entities in certain circumstances. The FRC has also issued “Amendments to FRS 102 – Interest rate benchmark reform (Phase 2)”. These amendments respond to the financial reporting issues arising from interest rate benchmark reform, and are intended to adapt and simplify accounting requirements in that context and provide disclosure of the nature and extent of the risks arising, thereby minimising reporting costs for entities applying FRS 102 and enabling them to provide useful information to the users of their financial statements. The amendments are effective for accounting periods beginning on or after 1 January 2021, with early application permitted.

FRC’s response to its recent consultation on Technological Resources: Using technology to enhance audit quality The Financial Reporting Council (FRC) has published its response to its recent consultation, Technological Resources: Using technology to enhance audit quality. The FRC’s response incorporates discussion of responses received, as well as discussion of other matters that have arisen throughout additional outreach and engagement with stakeholders. Almost all respondents to the consultation agreed that the use of technology could significantly improve audit quality, when deployed at the right time in the audit process and, crucially, by those with the right training. Respondents also agreed that, whilst additional application material and guidance would be beneficial, the current assurance model and audit standards do not themselves represent a significant impediment to the development and deployment of technology in audit. Training and skill sets were identified as many respondents’ primary concerns. A significant majority of respondents saw the recruitment of staff members with the right skill sets, alongside the development of appropriate training for current staff (both trainees and experienced), as a priority. Where a consensus around a specific action that the FRC can take to address concerns has been identified, or where the FRC has determined that no action is currently necessary, this has been laid that out within the individual sections of the paper. Given the almost constantly evolving landscape in this area, conversations about the relationship between technology and audit are ongoing. The FRC’s response captures current thinking on the present and future of technology in audit, but further discussion is still required in many areas. This response will serve as a foundation for discussions about the role of the regulator in relation to the use of technological recourse in audit, be that enhancing relevant standards, influencing international standard setters, developing guidance on select topics or clearly communicating expectations regarding the use of technology.

Snapshot of IAASA’s financial reporting enforcement activities in 2020 The Irish Auditing and Accounting Supervisory Authority (IAASA) has published summary information of its financial reporting enforcement activities undertaken during 2020. The Snapshot document may be accessed on the IAASA website at www.iaasa.ie. The primary role of IAASA’s accounting enforcement activity is to examine the financial reports of the 91 listed entities which fall within its remit for compliance with accounting standards. In 2020, IAASA examined 47 annual and half-yearly financial statements and also secured 82 undertakings from companies to improve their financial reporting in future years. IAASA published financial reporting related papers in 2020 including two compendia of financial reporting decisions.

Following public consultation, IAASA issues revised versions of Ethical Standard for Auditors (Ireland) and International Standards on Auditing (Ireland) Following public consultation, the Irish Auditing and Accounting Supervisory Authority (IAASA) has issued revised versions of: ● the Ethical Standard for Auditors (Ireland); ● certain International Standards on Auditing (Ireland) and the International Standard on Quality Control (Ireland) 1; and ● the Glossary of Terms, which defines the terms used in the Irish auditing framework. The main changes to the standards, which are designed to improve audit quality and enhance public confidence in audit in Ireland, are summarised in the feedback statement. IAASA recognises that this is a challenging time due to the impact of Covid-19 and that working arrangements have changed significantly in recent months. Therefore, the revised standards are effective for audits of financial statements for periods beginning on or after 15 July 2021, with early adoption permitted. ISSUE 114 | AIAWORLDWIDE.COM

Technical EUROPE ESMA issues Public Statement “Disclosures of significant accounting policies and significant judgements related to the third series of Targeted Longer-Term Refinancing Operations (TLTRO III)” The European Securities and Markets Authority (ESMA) has published a Public Statement calling for greater transparency regarding the financial reporting treatment of the ECB’s Targeted Longer-Term Refinancing Operations in the IFRS financial statements of banks. ESMA has observed that there is diversity in practice regarding the treatment of the TLTRO III refinancing transactions in banks’ financial statements. The observed diversity relates to: ● the banks’ assessment as to whether: ● the transactions involve belowmarket interest rate borrowings and, if so, whether the advantage of the below-market rate of interest needs to be accounted for under IFRS 9 Financial Instruments or IAS 20 Accounting for Government Grants and Disclosure of Government Assistance; ● the changes in estimates of payments due to revised assessment of meeting the eligibility criteria shall be accounted for in accordance with paragraph B5.4.6 of IFRS 9; and ● the calculation of the applicable effective interest rate. ESMA emphasises the importance of banks providing an adequate level of transparency regarding the financial reporting treatment of these transactions in their financial statements. In particular, ESMA recommends that the impacted banks provide: ● entity-specific disclosures of the significant accounting policies; and ● the significant judgements and assumptions related to the TLTRO III transactions; as required by paragraphs 117 and 122 of IAS 1 Presentation of Financial Statements and by paragraph B5 of IFRS 7 Financial Instruments: Disclosures. AIAWORLDWIDE.COM | ISSUE 114

EU consults on insolvency laws: increasing convergence of national laws to encourage crossborder investment The current initiative aims to address major discrepancies in national substantive insolvency laws of the member states. These discrepancies were recognised as obstacles for the establishment of a well-functioning Capital Markets Union. The issue at hand is corporate insolvency (i.e. nonbank insolvency), including companies, partnerships and entrepreneurs. More efficient and predictable insolvency frameworks and enhanced confidence in cross-border financing would help to strengthen capital markets in the Union. The initiative is complementary to the Directive on Restructuring and Insolvency, and – consequently – focuses on aspects of insolvency laws that were not addressed there. This public consultation will contribute to this process by gathering the perception and views of Europeans on a range of issues including: ● the liability and duties of directors of companies in the vicinity of insolvency; ● the status and duties of insolvency practitioners; ● the ranking of claims; ● avoidance actions; ● identification and preservation of assets belonging to the insolvency estate; and ● core procedural notions.

ASIA PACIFIC Singapore listed companies made good progress in adopting best practices relating to audit committees The latest study on audit committees (ACs) found that listed companies in Singapore have made progress in adopting corporate governance best practices. To build on the progress made, the study also highlighted areas for further improvement. Audit committees play an important role in ensuring the integrity of companies’ financial reporting. By adopting the best practices in corporate governance, the ACs will enhance the governance and oversight of the company’s corporate reporting function. The Accounting and Corporate Regulatory Authority (ACRA), the

Institute of Singapore Chartered Accountants (ISCA), Singapore Exchange Regulation (SGX RegCo) and Singapore Institute of Directors (SID) have commissioned the Singapore Institute of Technology (SIT) to conduct a study on the profile of ACs of listed companies in Singapore. There were similar studies conducted in 2009, 2011 and 2015. The 2020 study covers the ACs of 650 listed companies in Singapore comprising 1,539 individuals serving as AC chairmen and members. Led by Professor Ho Yew Kee, the study team gathered data from the annual reports published by the companies for 2019 and information provided by DC Frontiers Pte Ltd. The study team also surveyed 126 respondents and held focus group discussions and conducted individual interviews to gain further insights on the role of ACs.

Key Findings

The 2020 study presents an improvement in companies’ practices to raise the effectiveness of ACs. Some areas would benefit from further strengthening. The key findings include: ● The proportions of AC chairmen and members who held four or more AC positions have dropped to 4% and 1% respectively, as compared to 5% and 2% when the study was last conducted in 2015. A majority of 1,539 unique individuals who served in ACs sat on one AC, either as a chairman (76%) or a member (84%). Holding fewer AC positions allows individuals to dedicate time to discharge their oversight role. ● The number of executive directors in ACs had dropped to 24 in 2020, from 38 in 2015 study. This represents progress towards the standard under the Singapore Code of Corporate Governance (2018) (the CG Code) which recommends for all AC members to be non-executive. ● The proportion of women directors in ACs increased to 11% in 2020 from 8% in 2015. While gender is one aspect of diversity, listed companies are also encouraged to consider other characteristics such as experience, age and social background to enhance board/AC diversity in line with the principles of the CG Code. ● 33% of AC chairmen and 26% of AC members have served in the same ACs for more than 10 years, increasing from 21% and 18% in the previous study in 2015.

Technical To strengthen the diversity and independence of their boards, from 1 January 2022, directors who have served more than nine years will be deemed as non‑independent under the SGX Listing Rules, unless their appointments have been approved via a two-tier voting process of shareholders. Listed companies are encouraged to start preparing for the new requirements now. ● 94% of the companies have at least one financially-trained member in their ACs, comparable to the previous study in 2015. The CG Code recommends at least two members, including the AC Chairman, to be financially-trained. ● A vast majority (98%) of the ACs had the requisite of minimum three AC members – the same as the previous study in 2015. The Companies Act and CG Code require at least three members in the AC. ● Almost half (48%) of the survey respondents ranked “going concern and liquidity” as their top concern, alongside impairment of asset values and internal controls. Their areas of concern are consistent with ACRA’s guidance on the proposed areas of review by directors for 2020 financial statements. ● 90% of the survey respondents said that issues covered by ACs had expanded over time, to include areas such as risk management and cybersecurity. 78% of the survey respondents also indicated that ensuring the integrity of the financial reporting had required 10% to 50% more time due to the Covid-19 pandemic. The findings in the report are encouraging as they show that ACs are stepping up their game. Together with the new listing rules on the appointment of a second auditor and the mandating of Singapore-registered auditors, this will support the effective functioning of Singapore’s capital market and further enhance confidence and trust.

Standards Update (ASU) that clarifies the scope of the FASB’s recent reference rate reform guidance. In March 2020, the FASB issued guidance aimed at easing the potential accounting burden expected when global capital markets move away from the London Interbank Offered Rate (LIBOR), the benchmark interest rate banks use to make short-term loans to each other. That guidance, known as Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provided temporary, optional expedients and exceptions for applying accounting guidance to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. Some stakeholders have questioned whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform. These stakeholders indicated that the modification, commonly referred to as the “discounting transition,” may have accounting implications, and raised concerns about the potential need to reassess previous accounting determinations related to those derivatives and about the possible hedge accounting consequences of the discounting transition. The amendments in the new ASU clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The ASU is available at: www.fasb.org.

FASB clarifies scope of recent reference rate reform guidance

FASB proposes accounting alternative to the goodwill triggering event assessment for certain private companies and organisations

The Financial Accounting Standards Board (FASB) has issued an Accounting

The Financial Accounting Standards Board (FASB) has issued a proposed

UNITED STATES

Accounting Standards Update (ASU) intended to provide an accounting alternative that would reduce the complexity for certain private companies and not-for-profit organisations when performing the goodwill triggering event evaluation. Stakeholders are encouraged to review and to provide comments to the FASB on the proposed ASU by 20 January 2021. Under current GAAP, goodwill must be tested for impairment when a triggering event occurs that indicates that it is more likely than not that the fair value of the reporting unit is below its carrying value. Companies and organisations are required to monitor for and evaluate goodwill triggering events as they occur throughout the year. Some stakeholders raised questions about the value of evaluating a triggering event at an interim date when certain private companies and not-forprofit organisations only issue GAAPcompliant financial statements on an annual basis. They noted the cost and complexity of preparing interim balance sheets and projecting cash flows that, according to those stakeholders, may not be relevant at the annual reporting date when financial statements are issued. To address this, the proposed ASU would introduce an accounting alternative that would allow private companies and not-for-profit organisations that only report goodwill (or accounts that would be affected by a goodwill impairment such as retained earnings and net income) on an annual basis to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, on the annual reporting date only. It would eliminate the requirement for companies and organisations that elect this alternative to perform this assessment during interim reporting periods, limiting it to the annual reporting date only. The scope of the proposed alternative would be limited to goodwill that is tested for impairment in accordance with Subtopic 350-20, Intangibles – Goodwill and Other – Goodwill. The guidance would not be limited to a specified time period but would be available on an ongoing basis. No additional disclosures would be required. The proposed ASU is available at www.fasb.org. ISSUE 114 | AIAWORLDWIDE.COM

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